How R100 000 could grow to more than R1m: A familiar principle worth revisiting

Looking at the power of compounding is just flogging a dead horse – right? Maybe it isn’t. Maybe this is one “dead horse” that is worth the resuscitation effort every so often!

Over time, though, reinvested returns can build on one another. After 30 years of annual compounding, the investment could grow to just over R1 million.

The same starting amount, two different outcomes

Imagine two investors each put R100 000 into an investment with an assumed annual return of 8%. Neither adds money nor makes withdrawals.

For the first investor, the return is calculated each year on the original R100 000. That’s R8 000 a year, or R240 000 over 30 years. Those returns are retained but earn no further return, leaving a final balance of R340 000.

For the second investor, each year’s return stays invested and earns a return of its own. In year two, the 8% return is calculated on R108 000 – the original R100 000 plus the first year’s R8 000 return.

In each subsequent year, the same assumed rate applies to the growing balance. This is compounding: earning returns on both the original investment and the accumulated returns.

Read: Tax efficient transfer of family wealth: How R300 000 a year can save a South African family millions

The table compares how the balances could develop over time:

Suppose you withdraw R50 000 from a long-term investment to pay for a holiday. The trip may be important to you; saving for the future needn’t mean putting every pleasure on hold.

Still, it’s worth seeing the full trade-off. At the same assumed annual return of 8%, R50 000 left invested for 20 years, with returns compounded annually, would grow to about R233 048 before fees, taxes and inflation.

That doesn’t mean the holiday costs R233 048. You spend R50 000. The larger figure shows what that sum could become under this assumption if it were to remain invested.

The concern is less about a single withdrawal than a repeated habit of using retirement savings for expenses that could be planned for separately.

But I don’t have R100 000 to invest – surely we can let the horse rest in peace?

You don’t need a lump sum of R100 000 to invest. Regular contributions can accumulate gradually, and earlier contributions have longer to grow. Starting small won’t guarantee a particular result, but it gives each contribution more time to grow.

A pay rise may be a practical moment to increase those contributions. You could direct part of the increase towards savings before it becomes part of your regular spending.

If you’re starting later, the plan may need to change. You might save more or revise the goal, depending on how much time you have. Reinvesting returns can still contribute to growth, but it can’t remove the need to plan realistically.

Start with the date you’ll need the money

The money you’ll need for a property deposit next year serves a different purpose from the money you’re setting aside for retirement decades from now. Time horizon should form an integral part of each investment decision.

At Ultima, we encourage clients to consider when they’ll need their money. Accessible savings for nearer-term expenses can help protect long-term investments from avoidable withdrawals.

Later, drawing on capital or investment returns in retirement may be appropriate within a considered financial plan.

Read: Locking in your losses: What investors are really giving up

Before withdrawing from a long-term investment, weigh what the money can do for you now against what it might become if it remains invested.

All things considered, this “dead horse” still has a little life in it – and perhaps deserves a little TLC rather than a final farewell.

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